By Steven K. Beckner

(MNI) – The Federal Reserve Monday announced a sharp increase in
the amount of earnings transferred to the U.S. Treasury for 2010.

Thanks to the increase in interest the Fed has been earning on its
greatly enlarged securities portfolio and on its various emergency
lending facilities, the central bank was able to increase payments to
the Treasury by more than 65% to a new record high.

Preliminary unaudited results released by the Federal Reserve Board
indicate that the 12 Federal Reserve Banks provided for payments of
approximately $78.4 billion of their estimated 2010 net income of $80.9
billion to the U.S. Treasury.

That’s a $31.0 billion increase in payments to the U.S. Treasury
over 2009, which was $47.4 billion of $53.4 billion of net income.

The Fed said the increase was due primarily to increased interest
income earned on securities holdings during 2010.

The audited numbers are expected in the spring, with some
adjustments likely.

While the transfers to Treasury are an annual event and never part
of monetary policy, Fed officials did briefly address the exit strategy
during a conference call.

In particular, they said that asset sales would likely at some
point be part of the exit strategy.

However, sales would only occur once the economic recovery is on a
firm footing, the officials said, putting asset sales quite some way
down the road.

Fed securities holdings rose from $1.846 trillion at the end of
2009 to $2.159 trillion at the end of 2010 as a result of the Fed’s
large-scale asset purchases, better known as quantitative easing.

The Fed pays interest on excess reserves but only 25 basis points.
It also pays a small amount of interest to banks that convert their
reserves into term deposits in the Term Deposit Facility, which the Fed
established last May.

The payments to Treasury represent the Fed’s net interest earnings
over and above interest paid to reserve and term deposit holders and
other deductions.

Under the Federal Reserve Board’s policy, the residual earnings of
each Federal Reserve Bank, after providing for the costs of operations,
payment of dividends, and the amount necessary to equate surplus with
capital paid-in, are distributed to the U.S. Treasury.

The Fed said its 2010 net income “was derived primarily from $76.2
billion in income on securities acquired through open market operations
(federal agency and government-sponsored enterprise (GSE)
mortgage-backed securities, U.S. Treasury securities, and GSE debt
securities); $7.1 billion in net income from consolidated limited
liability companies (LLCs), which were created in response to the
financial crisis; $2.1 billion in interest income from credit extended
to American International Group, Inc.; $1.3 billion of dividends on
preferred interests in AIA Aurora LLC and ALICO Holdings LLC; and $0.8
billion in interest income on loans extended under the Term Asset-Backed
Securities Loan Facility (TALF) and loans to depository institutions.”

“Additional earnings were derived primarily from revenue of $0.6
billion from the provision of priced services to depository
institutions,” the Fed said. “The Reserve Banks had interest expense of
$2.7 billion on depository institutions’ reserve balances and term
deposits.”

** Market News International **

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